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ProfessionalContractors and ConsultantsAustralia

GUIDE TO WRITINGCONTRACTS FORINDEPENDENTCONTRACTORSAND CONSULTANTS(POST-PSI)

2 | GUIDE TO WRITING CONTRACTS FOR INDEPENDENT CONTRACTORS AND CONSULTANTS (POST-PSI)

A G U I D E TO W R I T I N G C O N T R A C T S F O R I N D E P E N D E N T C O N T R A C TO R S A N D C O N S U LTA N T S ( P O S T - P S I )

Disclaimer: This material is intended to provide general information, current at the time of first publication. Its contents do not constitute legal advice and should not be relied upon as such. You should seek advice on particular matters from your own legal or financial advisors.

Prepared by Clayton Utz Lawyers for Professionals Australia

LAWYERS


PAGE

04 1. INTRODUCTION

05 2. PERSONAL SERVICES INCOME REGIME

06 3. THE CONTENT OF THE CONTRACT

09 4. DEFENSIVE NEGOTIATION

10 5. THE CONTRACT AS A STAND ALONE DOCUMENT

11 6. TEST DRIVING THE CONTRACT

C O N T E N T S


1 . I N T R O D U C T I O N

Your ability to effectively provide services will be dependent on the contract you sign.

The contract is not the only tool by which project delivery will be achieved but it is, in many respects, the most important. An effectively-drafted contract will facilitate and provided it is followed, ensure the smooth, timely and cost effective delivery of the project and should be a single document to which the parties can refer for nearly all matters arising in the provision of contracted services. The most important elements to achieving this are certainty and thoroughness.

Having said that, some issues will arise outside the four corners of the contract. For instance, parties cannot contract out of certain obligations, such as that arising under section 52 of the Trade Practices Act 1974 (Cth). Section 52 places a prohibition on parties engaging in conduct which is misleading or deceptive, or likely to mislead or deceive. Tax issues, such as the new personal services income (PSI) regime, will depend on the actual activities of the contractor and will not be resolved by statements in the contract.

The purpose of this guide is to give you an overview of some issues you may encounter when negotiating contracts. It is intended to be read alongside the Professionals Australia Terms of Engagement Agreement/Contract for Services. However, these documents will need to be amended for your particular circumstances. You may need to consult your own advisors when doing so.


The PSI rules will have negative tax consequences for a contractor and will generally apply unless the contractor can show that it conducts a personal services business. The contractor can seek a determination from the ATO that it is conducting such a business. Alternatively, contractors can form their own view that they satisfy one of the four personal services business tests. These are discussed below.

It should be noted that the tests apply in a more restricted way if 80% or more of the contractor’s service income is from one source. In these circumstances, contractors must either satisfy the results test or obtain a determination from the ATO that they are conducting a personal services business. It is not sufficient to merely satisfy the unrelated client’s test, the employment test or the business premises test if 80% or more of the contractor’s income is from one source.

2.1 The results testThis test requires that at least 75% of the contractor’s services income during the income year is for producing a result and the contractor is required to supply any equipment needed to perform the services and is liable for the cost of rectifying any defect in the work performed.

If the contractor wishes to satisfy this test, the contractor should ensure that the contract reflects the requirement that the contractor produce a particular result, be required to supply the necessary equipment and be liable for the costs of rectification.

2 . P E R S O N A L S E R V I C E S I N C O M E R E G I M E

2.2 The unrelated client’s testThis test requires that a contractor provide services to two or more unassociated entities during the year and that those services are provided as a result of making offers or invitations to the public to provide the services.

These are not matters that can be resolved in the drafting of the contract. If a contractor were to rely on this test, the contractor would need to do so by reference to all of the activities conducted by the contractor.

2.3 The employment testUnder this test, contractors need to engage one or more other people to assist them in their work and those other person or persons need to be responsible for at least 20% by market value of the contractor’s work for the particular year of income.

If this test is to be satisfied, it would be helpful if the contract was drafted in such a way as to allow the contractor to be assisted by others in the performance of the work under the contract. However, whether the test is satisfied would depend on persons other than the contractor actually performing some of the work under the contract and that would need to be proven by the facts rather than by the contract itself.

2.4 The business premises testThis test is met if at all times during the income year, the contractor maintains and uses business premises.

It would not generally be possible to establish that this test is satisfied by the wording of the contract. This test will only be satisfied if the contractor has separate business premises.


The principal may dictate a lot of the content of your contract. However, as far as possible, it is important for you to ensure that your procedures and requirements are adequately dealt with yet reconciled or consistent with the procedures and requirements of the principal.

Tax, liability and other questions may also arise in the context of particular clauses.

3.1 PartiestothecontractIt may sound simplistic, but it is necessary for the parties to a contract to give some thought to which parties will actually be named on the document. For instance, will you sign the contract in your own right or will you sign on behalf of your ‘personal services entity’ (this term is used in the PSI legislation to denote a company or other entity through which you conduct your business). While this will not be determinative of your PSI liabilities (as stated, the PSI tests for running a personal services business will look to actions over words) it will be illustrative. It may affect your other obligations, such as the maintenance of insurance.

3.2 CalculationofpaymentsTo the parties, the most important part of any contract will be those terms dealing with payments to be made and received. In dealing with this, the following questions may arise:

• Will payment be made as a lump sum on the basis of producing a result contracted for, or will payment be calculated on an hourly, weekly, or monthly basis?

• Are requests for payment to be invoiced?

3 . T H E C O N T E N T O F T H E C O N T R A C T

• What provisions are made for the payment of GST?

• Does payment include amounts relating to superannuation, annual leave or long service leave?

• Who is to be responsible for the payment of licensing and registration fees, ASIC charges, travel costs and other amounts?

These questions should be borne in mind not only when calculating the amounts to be paid under the contract, but they should also be reflected in the terms of the contract itself.

The method of calculating payments will also affect your taxation liabilities. For instance, arrangements for payment on an hourly basis, rather than on the production of a result, may lead to potential difficulty in demonstrating that you are running a personal services business.

Where you use equipment provided by the principal, disputes about cost may arise in the calculation of internal plant hire rates. There are several accepted accounting approaches for calculating the cost of company-owned plant, so it is advisable to address issues such as this at the pre-contractual stage. It will be best to agree on an actual rate, or an identifiable formula, for the calculation of cost, and for this to be incorporated into the contract. Again, there will be GST and other tax implications for any internal plant hiring arrangements.

3.3 Payment proceduresIn negotiating the mechanics of how claims are to be made and payments received, you will need to be mindful of accounting procedures from your point of view and that of the principal. For instance, if the accounting system records costs and income on an “end of month” basis, it would be easier to provide in the contract for claims to be made for work undertaken up to the end of the month, rather than the mid point of the month. It may also be important for you to know the capabilities of your system in producing progress reports. Some accounting systems track some costs only on a cost centre basis, rather than a project specific basis.

3.4 DefinitionsFor a contract to be effective, there must be a ‘meeting of the minds’. The parties must ensure that they have the same ideas in mind, particularly when using certain terminology. For instance, most contracts will contain provisions which invoke the concept of cost, including lump sum contracts. As different organisations may measure costs differently, you will need to ensure that all contracting parties have a consistent understanding of measuring of cost. It is useful for a contract to include a definitions section in which parties can outline exactly what they mean in using certain terms, or to define terms which are used throughout the contract.


3.5 Liability and insuranceAllocation of risks which may arise under an arrangement is an important part of any contract. You will need to be aware of the types of risks to which you may be exposed. You will then need to determine how well those risks fall within your current insurance coverage.

However, the mere fact that you have insurance regarding a certain risk is not a reason for failing to address the allocation of responsibility for that risk in the contract - insurance responds to a party’s liability, and liability is allocated by the terms of the contract. You also need to be aware of your obligations under insurance policies. For instance, if your insurance policy contains a subrogation right (a clause allowing the insurer to sue the party that has caused the damage), giving away your right to sue another party for damages effectively gives away the insurer’s subrogated right to sue. This may render your insurance policy void or be grounds for your insurer to decline indemnity.

The most effective allocation will place responsibility for risk with the party best placed to deal with it, in all the relevant circumstances. It should be noted, though, that liability for the cost of rectifying faults is an important indication that you are running a personal services business. If all responsibility for risks and insurance are allocated to the principal, you may fail at least one of the tests provided in the PSI legislation.

3.6 EquipmentandstaffYou will need to be aware of the equipment required to complete obligations under a contract. The contract should then include a term which details the equipment to be provided by each party. Fulfilment of one of the tests under the PSI legislation will require you to provide any equipment necessary to produce the results required by the contract.

Staff and employees may also be an issue. Will you be working with employees of your principal, or will you provide your own staff to complete the project? Working with employees of your principal will require a clear delineation of the chain of command and your rights and responsibilities with those employees. Providing your own staff will necessitate looking at your obligations for WorkCover or other workplace insurance schemes, superannuation obligations and PAYG withholding obligations. On the other hand, if you have one or more employees of your own, you are likely to pass another of the PSI tests.


3.7 LocationContracting parties will need to give some thought to where the tasks required to be performed under a contract are to be carried out. Does the nature of the task require you to work at the premises of the principal? Will you maintain your own distinct premises adjacent to that of the principal? Do you maintain your own business premises elsewhere? The answers to these questions may impact on your Workplace Health and Safety obligations and your need for public liability insurance. Also, where you do not maintain your own premises, you may not be considered to be running a personal services business, according to one of the tests.

In many cases, the various contractual obligations will need to be performed in different locations. For instance, you may sign the contract at the offices of your legal advisor, create the product being supplied on your premises and install it at the premises of the principal.

In practise, you will need to know the areas under your control and extent of that control.

3.8 RestraintsoftradeAs a contractor, a key element to maintaining your business may be your ability to develop relationships with more than one client. You will therefore need to be wary of clauses in contract which restrain this ability. Such clauses may attempt to restrict the location in which you can work, prevent you from working for the principal’s competitors after you have finished performing the duties under the contract, or prevent you from using skills gained in the course of performing your duties under the contract for other clients. Of course, many standard contracts will include provisions relating to confidentiality of information gained from your particular client or dealing with the assignment of intellectual property rights in any material created for your client. It may become a question of degree in negotiating how your future courses of conduct will be restricted by accepting work from a particular principal.

From a legal viewpoint, parties will need to be aware of the provisions of the Trade Practices Act which deal with anti-competitive behaviour. Tax issues also arise; for instance, one of the PSI tests requires you to provide services to two or more clients who are not associates of either yourself or each other. Clearly, if the contract restricts you to performing services for the principal, you would fail this test. Furthermore, you may be liable to capital gains tax on amounts you receive in respect of a restraint of trade.


4 . D E F E N S I V E N E G OT I AT I O N

In negotiating contracts, you should be prepared to assume that the other party is going to try to act contrary to your interests. In this way, contract negotiation can be compared to defensive driving, which assumes that other road users are not going to obey the rules. A contract should prescribe rights and obligations of the parties to cover all possible outcomes, as comprehensively as possible. Clearly, it will be impossible to cover every conceivable scenario but the parties should aim to cover as many as can reasonably foreseen.

Pre-contractual discussions and contract negotiations often take place in an atmosphere of goodwill. Naturally, you may be tempted to assume that such feelings will continue through the project. While the majority of contracts will not be the subject of litigation, you may find that your relationship with the principal becomes more strained over the course of the project. A comprehensive and precise contract leaves little scope for dispute between the parties.

Parties should always be suspicious about leaving contractual terms vague and imprecise. Such terms may give another party a wide discretion to commit the parties to an unexpected course of events for which no remedies are available. Clauses which attempt to introduce an element of subjectivity to any decisions should be resisted. This includes such phrases as “in the reasonable view of A…” or “if B considers …” should be avoided, as far as possible.


5.1 Pre-contractual communicationsThe contract should be complete in itself. While the document will take its final form at the end of a series of written and oral exchanges between the parties, these exchanges should never be relied upon to form part of the contract.

Where relevant, the content of these communications should be incorporated in the terms of the final contract document. Attempting to incorporate by reference communications between the parties during the contract negotiation process, results in imprecision, confusion and even contradictions. At best, terms of the contract are more difficult to ascertain than if they were all contained in one document.

5.2 Post-contractual agreementsLikewise, a lazily drafted contract may refer to matters which are to be decided by the parties at a later date. At law, agreements to agree are treated as no agreement at all, and therefore no binding obligations arise. Provisions such as “on terms as will be agreed between the parties” should be avoided. Should the parties fail to agree at that later point, it is likely that no remedies will be available for losses arising from a failure to perform expected obligations. Leaving matters to be decided in the future again makes it difficult to determine the actual responsibilities of the parties from the one document. However, if it is necessary to refer to matters which are to be decided at a later date, the contract should include a mechanism for resolving an impasse arrived at by the parties because of a failure to decide.

5 . T H E C O N T R A C T A S A S TA N D A L O N E D O C U M E N T

5.3 RepresentationsandassumptionsIn the same way, over the course of negotiating the contract, parties will have probably made many representations to one another. These may take express or implied form and will include almost any provision of information by one party to the other. However, the majority of these representations will probably not make it into the final document.

Alternatively, parties may make assumptions in relation to project delivery which later turn out to be incorrect. For instance, an excavation contractor may make a range of assumptions regarding rock hardness and water levels. Such assumptions may arise on information provided to tenderers for a project.

It is universal practice to state in the contract that parties have not relied on any representations other than those contained in the document. Parties may remain liable under section 52 of the Trade Practices Act for making misleading and deceptive representations. However, inclusion of a non-reliance provision will make a claim more difficult to establish.

If you plan to rely on representations made by your principal you should ensure that they have been included in the contract. If a party is reluctant to include such information in the contract document, some other means should be used to record the reliance, such as writing to the other party stating the material on which you have relied. However, there may be good reason to be suspicious of parties who are reluctant to include such information in the final document.


6 . T E S T D R I V I N G T H E C O N T R A C T

It is essential that parties to a contract not lose sight of it as a working document. The parties must be satisfied that the contract will work in practice on a day-to-day basis. A helpful way of ensuring the practicality of the contract is to run through as many theoretical examples as possible. These should encompass problems and scenarios that are likely to be encountered by the parties in performing their obligations under the contract and should cover each step of a project. This will allow the parties the opportunities to gauge whether scenarios likely to be encountered are properly covered by a provision of the contract.

Forexample,ifanothercontractortoaprojectdamagesequipmentwhichyouhavejustfinishedinstalling,doesthecontractprovidefor:

• Who will repair the damage?

• Who will pay for repairs and how will the cost of repair be measured?

• Who is responsible for flow on effects, such as time delays?

• Is there a mechanism to make a claim for a time extension?

• What procedures are to be followed in resolving disputes?

• What remedies are available to parties?

STREET ADDRESS 163 Eastern Rd, South Melbourne Victoria 3205, Australia

POSTAL ADDRESS GPO Box 1272, Melbourne Victoria 3001, Australia

TELEPHONE 1300 273 762

FAX +61 3 9695 8902

EMAIL [email protected]

WEB www.professionalsaustralia.org.au

ProfessionalContractors and ConsultantsAustralia

GUIDE TO WRITING CONTRACTS FOR INDEPENDENT CONTRACTORSAND CONSULTANTS(POST-PSI)

professional contractors and consultants australia guide ...€¦ · contract. you also need to be...

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